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This article introduces this special issue on routines. It offers some suggestions as to why the concept of routines is considered central in methodological considerations of capabilities and organizational evolution. The contributors to this special issue propose various analytical tools, and provide some missing pieces from the puzzle related to the prominent role of routines. Issues discussed in the papers include methodological individualism. Routines lie between the individual and the firm levels of analysis because they are enacted by individuals in a social context. It is also suggested that a multilevel research agenda provides a finer-grained analysis because organizational routines are not isolated units but are entangled among the various organizational layers.

The article tries to advance our understanding of institutional economics by critically examining the currently dominant discourse on institutions and economic development. First, I argue that the discourse suffers from a number of theoretical problems – its neglect of the causality running from development to institutions, its inability to see the impossibility of a free market, and its belief that the freest market and the strongest protection of private property rights are best for economic development. Second, I point out that the supposed evidence showing the superiority of ‘liberalized’ institutions relies too much on cross-section econometric studies, which suffer from defective concepts, flawed measurements and heterogeneous samples. Finally, I argue that the currently dominant discourse on institutions and development has a poor understanding of changes in institutions themselves, which often makes it take unduly optimistic or pessimistic positions about the feasibility of institutional reform.

This paper relates firm size and opportunism by showing that, given certain behavioural dispositions of humans, the size of a profit-maximizing firm can be determined by cognitive aspects underlying firm-internal cultural transmission processes. We argue that what firms do better than markets – besides economizing on transaction costs – is to establish a cooperative regime among its employees that keeps in check opportunism. A model depicts the outstanding role of the entrepreneur or business leader in firm-internal socialization processes and the evolution of corporate cultures. We show that high opportunism-related costs are a reason for keeping firms’ size small.

How can evolutionary ideas be applied to the study of social and political institutions? Charles Darwin identified the mechanisms of variation, selection and retention. He emphasized that evolutionary change depends on the uniqueness of every individual and its interactions within a population and with its environment. While introducing the contributions to this special issue, we examine some of the ontological positions underlying evolutionary theory, showing why they are appropriate for studying issues in economics, political science and sociology. We consider how these ideas might help us understand both institutional change and the formation of individual preferences.

Ha-Joon Chang, in his article ‘Institutions and Economic Development: Theory, Policy and History’, raises doubts about the effects of institutions on economic development and questions the positive effects of entirely free markets based on secure private property rights. We respond by stressing that institutions structure the incentives underlying individual action, secure private property rights are indispensable for prosperity, institutions have a first-order effect whereas policies only have a second-order effect, successful institutional change comes from within a society, and, given the status quo of developing countries, first-world institutions are likely not to be available to them.

This paper proposes an information perspective on path dependence. From this perspective, historical paths are important insofar as knowledge about them shapes current decisions, for better or worse. A key consideration is the extent to which relevant information is fully inscribed in the existing configuration of state variables, including organizational structures and institutional norms. Using a chess analogy, path dependency arises whenever a decision maker's ‘move’ depends not only upon existing state variables, but also knowledge of the path by which this configuration came about. This chess analogy is then extended to various institutional contexts such as legal expungement of criminal records, patient privacy rights, and corporate executive succession strategies. A formal notation is introduced to specify this definition more precisely, and to compare it with other perspectives on path dependency, such as lock-in effects, increasing returns to scale, ergodic equilibria, and generalized notions that ‘history matters’.

Organizational routines coordinate the interactions and use of knowledge within firms. Efficient routines can imply a competitive advantage for a firm, deficient ones a disadvantage. This depends not only on how smoothly the intra-organizational interactions are in fact orchestrated, but also on what goals this orchestration serves: the organizational objectives or the convenience, effort minimization, or other idiosyncratic goals of involved organization members. Since organizational routines represent a case of collective action, the conditions under which organizational routines emerge cannot be neglected. They hinge on cognitive and motivational attitudes of the organization members suggesting an individualistic perspective on organizational routines.

Most powerful analytical tools used in the social sciences are well suited for studying static situations. Static and mechanistic analysis, however, is not adequate to understand the changing world in which we live. In order to adequately address the most pressing social and environmental challenges looming ahead, we need to develop analytical tools for analyzing dynamic situations – particularly institutional change. In this paper, we develop an analytical tool to study institutional change, more specifically, the evolution of rules and norms. We believe that in order for such an analytical tool to be useful to develop a general theory of institutional change, it needs to enable the analyst to concisely record the processes of change in multiple specific settings so that lessons from such settings can eventually be integrated into a more general predictive theory of change.

It is argued that routines can be fruitfully conceived of as multilevel mechanisms. The merits of viewing routines as multilevel mechanisms are that it helps in putting together a coherent picture of what routines are, what routines do, and how they do it. In particular, it helps in getting a clearer picture of how skills and routines are ontologically (rather than metaphorically) related to each other. It allows us to see that while routines are generative mechanisms producing recurrent patterns of firm behavior, as multilevel mechanisms they themselves are at the same time recurrent patterns of interaction within firms. Because of its ‘behavioral’ spirit, viewing routines as multilevel mechanisms (rather than as, for example, unobservable dispositions of firms to energize patterns of behavior in firms) greatly facilitates further empirical research on crucial, as yet unresolved issues, such as how stable and robust routines are and to what extent firm behavior is routine.

Human communities and ego-centric social networks have a distinct size that reflects a generic relationship between relative neocortex volume and social group size that is characteristic of primates in general (the ‘social brain hypothesis’). Human networks are structured into layers that reflect both differences in the frequency of contact and levels of emotional closeness. The rate of decay in the frequency of contact across network layers is very steep, and we might expect this to have a very significant effect on the likelihood of Ego finding out some novel fact when information flow is limited to face-to-face interaction. I use an analytical model parameterized by these contact frequencies to show that there may be little advantage in having a network larger than ~150 for the purposes of information exchange. I then present a Monte Carlo simulation model to show that structure significantly impedes the rate of information flow in structured communities.

Previous research, notably Baumol (1990), has highlighted the role of institutions in channeling entrepreneurial supply into productive, unproductive, or destructive activities. However, entrepreneurship is not only influenced by institutions – entrepreneurs often help shape institutions themselves. The bilateral causal relation between entrepreneurs and institutions is examined in this paper. Entrepreneurs affect institutions in at least three ways. Entrepreneurship abiding by existing institutions is occasionally disruptive enough to challenge the foundations of prevailing institutions. Entrepreneurs sometimes have the opportunity to evade institutions, which tends to undermine the effectiveness of the institutions, or cause institutions to change for the better. Lastly, entrepreneurs can directly alter institutions through innovative political entrepreneurship. Like business entrepreneurship, innovative political activity may be productive or unproductive, depending on the incentives facing entrepreneurs.

The discussion about the role of institutions in economic development should revolve around the relative performance of institutions and not around the alleged superiority of one system over the other.

In his critique of the newer approach in economic development emphasizing institutional reforms, Ha-Joon Chang, in his article titled ‘Institutions and Economic Development: Theory, Policy and History’, equates New Institutional Economics with the program of liberal reforms for least developed countries (LDCs) and blames the former for the alleged failure of the latter. He argues with some justice that the dominant discourse in New Institutional Economics insufficiently appreciates the complexity of institutions; as a consequence, the difficulty of transplanting institutions is largely discounted. His case, however, is marred by his attempt to push down his ideological biases by marshalling inchoate, highly questionable and often contradictory ideas as facts. Going beyond a critical examination of the New Institutional Economics inspired discourse in development economics, he advocates his own version of beneficial development policies for LDCs – namely, economic democracy and industrial policies. His proposals are not only highly questionable, but they amount to adopting a double standard of exempting himself from the very criticisms he levies against New Institutional Economics – ignoring the difficulty of importing foreign institutions. Presuming to play God, like many development economists, he ignores the essential fact that an unwilling horse cannot be made to drink.

This paper proposes a composite measure of ethnic fragmentation, the Social Diversity Index (SDI) to capture inherent multidimensionality not captured in the prevalent Ethno-Linguistic Fractionalization Index (ELF). The SDI more accurately demonstrates the direct effects of hidden diversity values and the extent and corresponding costs of ethnic diversity on economic growth. A comparative empirical analysis of the results from 132 countries employing the SDI and the ELF Index, suggests that the SDI is more robustly correlated with growth, and does a moderately better job of explaining the effect of exogenous static ethnic diversity. However, the empirical effects of ethnic diversity on growth tend to diminish with the inclusion of additional macroeconomic variables.

In biology, the laws that regulate the structuring and change of complex organisms, characterised by interlocking complementarities, are different from those that shape the evolution of simple organisms. Only the latter share mechanisms of competitive selection of the fittest analogous to those envisaged by the standard neoclassical model in economics. The biological counterparts of protectionism, subsidies and conflicts enable complex organisms to exit from long periods of stasis and to increase their capacity to adapt efficiently to the environment. Because of their interlocking complementarities, most institutions share the laws governing the structure and change of complex organisms. We concentrate on the complementarities between technology and property rights and consider historical cases in which organisational stasis has been overcome by mechanisms different from (and sometimes acting in spite of) competitive pressure. The evolution of institutions cannot be taken for granted; but even when institutions seem frozen forever by their interlocking complementarities, their potential for change can be discovered by analysis of those interactions.

Existing theories of organizational routines have generally had simplistic and extreme views of artifacts as fully deterministic or largely inconsequential. Artifacts have been treated as either too solid to be avoided, or too flexible to have an effect. This paper endeavours to improve our understanding of the influence of artifacts on routines dynamics by proposing a novel and deeper conceptualization of their mutual relationship. In drawing from recent advances in Routines and STS/Performativity Theory, the paper contributes to advancing our understanding of routines dynamics by bringing artifacts and materiality from the periphery to the very centre of routines and Routines Theory.

Generalized Darwinism and self-organization have been positioned as competing frameworks for explaining processes of economic and institutional change. Proponents of each view question the ontological validity and explanatory power of the other. This paper argues that information theory, rooted in modern thermodynamics, offers the potential to integrate these two perspectives in a common and rigorous framework. Both evolution and self-organization can be generalized as computational processes that can be applied to human social phenomena. Under this view, evolution is a process of algorithmic search through a combinatorial design space, while self-organization is the result of non-zero sum gains from information aggregation. Evolution depends on the existence of self-organizing forces, and evolution acts on designs for self-organizing structures. The framework yields insights on the role of agency and the emergence of novelty. The paper concludes that information theory may provide a fundamental ontological basis for economic and institutional evolution.

In this paper we discuss the origins and emergence of organizational routines and capabilities. We first argue that there are theoretical and endogeneity-related concerns associated with the key antecedents and mechanisms specified by the extant routines and capabilities literature. Specifically, we explicate the behaviorist and empiricist foundations of the organizational routines and capabilities literature and the extant emphasis placed on experience, repetition, and observation as the key antecedents and mechanisms of routines and capabilities. Based on this discussion we highlight several, endogeneity-related concerns, namely: (1) the problem of origins and causation, (2) the problem of extremes, (3) the problem of intentionality, (4) the problem of new knowledge, and (5) the problem of the environment. We introduce the ‘poverty of stimulus’ argument and discuss how an internalist or rationalist, choice-based approach can provide a more fruitful (though preliminary) foundation for understanding organizational behavior and capabilities.

Economics has changed enormously since Professor Ha-Joon Chang burst onto the scene in the early 1990s. His critiques of mainstream economics are far more applicable to the discipline at that time than they are now. Whatever the shortcomings of the current literature on institutions and development, progress is not being held back by conceptual blinders imposed by economic orthodoxy. Game theory and behavioral economics have enriched the menu of models acceptable in the professional journals. More important, empirical standards have greatly advanced. Behavioral models are being confronted with computerized games and even with in-the-field experiments, especially in poor countries where recruiting experimental subjects is cheaper. The recent literature does not merely undermine traditional assumptions; it offers parsimonious interpretations that help us to understand the economy and the polity better than before.

Johan Åkerman and Erik Dahmén's institutional theory of economic fluctuations is a constructive alternative to traditional macroeconomic approaches and also to modern business-cycle analysis based on microeconomic optimization models. By its integration of a business-cycle and growth perspective, Åkerman and Dahmén's analysis was similar to that of Schumpeter in Business Cycles. But their notions of malinvestment, structural tensions, and development blocks provided an original explanation of the turning points in the business cycle. The Åkerman–Dahmén approach is more valid for innovation-driven cycles such as the ICT boom in the late 1990s and the subsequent crisis than for cycles with an independent role of financial-market conditions.